PERPETUAL INVENTORY SYSTEM: OPERATION, ADVANTAGES - DUDAS - 2024

The perpetual inventory system is an inventory accounting method that immediately records the sale or purchase of inventory through the use of computerized systems and enterprise asset management software.

It shows a fairly detailed view of inventory changes with immediate reports on the amount of inventory in stock, and accurately reflects the level of available merchandise.

Perpetual inventory is the preferred method of tracking inventory, as it can continually generate reasonably accurate results, if properly managed.

As a business, having more inventory than you need is costly and can lead to waste. On the other hand, having too little means you run the risk of disappointing customers and losing sales revenue to your competitors.

Because perpetual inventory software is always up to date, you have instant visibility into stock levels, allowing you to respond more quickly to changes in demand.

How does the procedure work?

With the perpetual inventory system, a company continually updates inventory records, accounting for its additions and subtractions for activities such as:

- Inventory items purchased.

- Merchandise sold from stock.

- Materials taken from inventory to be used in production.

- Discarded items.

The system works perfectly when coupled with a computer database, updated in real time by warehouse staff using barcode scanners or by salespeople using point of sale terminals.

Periodic inventory versus perpetual inventory

Traditionally, if you wanted to know how many items were available in the warehouse, you had to perform a physical count and reconcile it with manual or automated batch-based systems.

Companies physically accounted for inventory at the end of a specified period, and inventory figures were updated at that time. This is known as a periodic inventory system, because the information is updated periodically.

The perpetual inventory system uses inventory management software and processes that allow real-time updating of inventory movement.

Employees use barcode scanners to record sales, purchases, or returns as they occur.

This information is sent to a database that is continually updated to record each change. The perpetual inventory update is what gives the system its name and sets it apart from the periodic approach.

Perpetual inventory accounts

Under this system, it is not necessary to maintain a purchasing account because the inventory account is charged directly with each merchandise purchase.

The accounts to be posted in this system are:

- When merchandise is purchased to store it in inventory:

- When expenses such as freight, insurance, etc. are incurred, added to the cost of the merchandise:

- If the merchandise is returned to the supplier:

- When the merchandise is sold:

- If the merchandise is returned by customers:

- When a difference is found between the amount of the inventory account and the physical count:

Advantage

Allows precise replenishment

Changes in inventory are recorded in real time, when buying and selling inventory. This enables you to produce reports that immediately identify inventory items that are running low.

Discover the decline and theft

In a periodic inventory system, inventory is adjusted at the end of the period, validating the physical inventory count. This hides any theft, decline, or even counting errors, when this adjustment is transferred to the cost of goods sold account.

A perpetual system will compare the inventory value in the system with the end of period count and allow you to investigate any discrepancies.

Produces more accurate interim financial statements

Because in the periodic inventory system the inventory values ​​are not changed during the period, both the inventory account in the balance sheet and the cost of merchandise sold account in the profit and loss statement are incorrect throughout the period. period.

A perpetual system keeps those amounts correct and provides a more accurate set of financial statements throughout the period.

Closer management of inventory levels

Inventory levels are always correct and are accessed online at any time. You can correctly calculate your turnover rate to know if sales are slowing down or if products are no longer selling quickly.

Integration with other business systems

Real-time inventory information is vital for finance and accounting teams. Integration of the inventory system with financial systems helps ensure accurate tax and regulatory reporting.

Sellers can provide a better customer experience, directly impacting their reputation. Its integration with merchandising systems gives that team a current snapshot of what is selling and what is not.

Disadvantages

High cost of implementation

To use the perpetual inventory system, a business must first install specialized equipment and software. It requires a large initial investment, a lot of resources and time to implement the system correctly.

After installing the necessary equipment and software, their regular maintenance and updates will remain mandatory, costing businesses even more.

Greater Complexity

It requires companies to offer training to each of the employees due to the complexity of the system.

Employees will need training on how to use the company's unique software and will also need training on the use of special equipment, such as scanners.

Recorded inventory may not reflect actual inventory

It can be a disadvantage for transactions to be posted as soon as they take place, because posted inventory may not reflect actual inventory over time.

This is because in a perpetual inventory system, physical inventory counts are not used frequently.

With a greater number of people entering transactions in the system, the company assumes a greater risk of making mistakes due to human error.

More consumption time

With the periodic inventory system, companies allocate a certain time to record inventories.

They can be registered weekly, monthly or even annually. This makes the periodic inventory system less time consuming than the perpetual inventory system.

With the perpetual system, every transaction must be recorded immediately. Auditors should review transactions to make sure they are correct and physical inventories still need to be done to find discrepancies in figures.

References

1. Steven Bragg (2017). Perpetual inventory system. Accounting CPE Courses & Books. Taken from: accountingtools.com.
2. Investopedia (2018). Perpetual inventory. Taken from: investopedia.com.
3. Accounting For Management (2017). Perpetual inventory system. Taken from: accountingformanagement.org.
4. Oracle Netsuite (2018). Why use a perpetual inventory system? Taken from: netsuite.com.
5. Angie Mohr (2018). The Advantages of the Perpetual Inventory System. Small Business - Chron.com. Taken from: chron.com.
6. Tanya Robertson (2018). The Disadvantages of the Continuous Inventory System. Small Business - Chron.com. Taken from: smallbusiness.chron.com.